Abstract
The intent of this paper is to prepare an income statement for Nybrostrand Company in good format, compare the income or loss compare to the original income statements and explain the importance of the matching concept.
1. Income statement for Nybrostrand Company.
Nybrostrand Company
Balance Sheet from 01January to 31-December-2011
Particulars
Amount
Assets:
Accounts Receivable
$36,500.00
Cash
$16,700.00
Inventory
$76,500.00
Total Current Assets
$129,700.00
Equipment
$395,000.00
Total Fixed Assets
$395,000.00
Total Assets
$524,700.00
Liabilities & Shareholders Equity:
Accounts Payable
$78,000.00
Total Current Liabilities
$78,000.00
Long Term Debt
$127,000.00
Total Long-Term Liabilities
$127,000.00
Total Liabilities
$205,000.00
Common Stock
$10,000.00
Paid in Capital
$50,000.00
Retained Earnings
$259,700.00
Total Shareholders Equity
$319,700.00
Total Liabilities & Shareholder’s Equity
$524,700.00
2. There is a huge difference in the original report compared to the second statement since the income statement became inaccurate due to the error made by the bookkeeper which is contrary to the guidelines established by the generally accepted accounting principles (GAAP).
The expenses of an enterprise should be matched with the revenues of the reporting period so as to show the companys correct profitability in the reporting period. It is based on the cause and effect relationship. The sale of goods leads to the cost of goods sold and the sales commission expense. If the cost incurred is not related to the revenue or to a particular accounting period, then it should be recorded immediately. Example Advertising Expense and Research and Development expenditure is to be recorded immediately because the measurement of future economic benefit cannot be made.
The Income Statement and Balance Sheet are used to report the financial results of the company. The income statement gives information about the revenues and expenses of a business so that the Net Income earned can be determined. The Balance Sheet provides the details about the asset, liabilities and shareholders equity of the business enterprise. It shows the overall results of the business. The company is able to earn income of $150,150 for the year ended 31st December, 2011. The proportion of shareholders equity is greater than the proportionof liabilities in the capital structure of the company.
The retained earnings are calculated by adding the net income of $150,150 and previous retained earnings balance of $108,550. The previous balance of retained earnings is calculated by difference of debit and credit side of trial balance. ($959,550 – $851,000).
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